A Tale of Two Town Houses

Real estate may be as important as religion in explaining the infamous gap between red and blue states.

By Virginia Postrel

In 2000, my husband and I moved out of our mid-1970s three-bedroom town house in Los Angeles and into a brand-new three-bedroom town house in Uptown Dallas. At the time, the two were worth about the same, but the Dallas place was 1,000 square feet bigger. We’ve moved back to L.A., and we’re glad we kept our old house. Over the past seven years, its value has roughly doubled. By contrast, we sold our Dallas place for $6,500 less than we paid for it.

It’s not that we bought into a declining Dallas neighborhood: Uptown is one of the hottest in the city, with block upon block of new construction. But the supply of housing in Dallas is elastic. When demand increases, because of growing population or rising incomes, so does the amount of housing; prices stay roughly the same. That’s true not only in the outlying suburbs, but also in old neighborhoods like ours, where dense clusters of town houses and multistory apartment buildings are replacing two-story fourplexes and single-family homes. It’s easy to build new housing in Dallas.

Not so in Los Angeles. There, in-creased demand generates little new supply. Even within zoning rules, it’s hard to get permission to build. When a local developer bought three small 1920s duplexes on our block, planning to replace them with a big condo building, neighbors campaigned to stop the proj­ect. The city declared the charming but architecturally undistinguished buildings historic landmarks, blocking demolition for a year. The developer gave up, leaving the neighborhood’s landscape—and its housing supply—unchanged. In Los Angeles, when demand for housing increases, prices rise.

Dallas and Los Angeles represent two distinct models for successful American cities, which both reflect and reinforce different cultural and political attitudes. One model fosters a family-oriented, middle-class lifestyle—the proverbial home-centered “balanced life.” The other rewards highly productive, work-driven people with a yen for stimulating public activities, for arts venues, world-class universities, luxury shopping, restaurants that aren’t kid-friendly. One makes room for a wide range of incomes, offering most working people a comfortable life. The other, over time, becomes an enclave for the rich. Since day-to-day experience shapes people’s sense of what is typical and normal, these differences in turn lead to contrasting perceptions of economic and social reality. It’s easy to believe the middle class is vanishing when you live in Los Angeles, much harder in Dallas. These differences also reinforce different norms and values—different ideas of what it means to live a good life. Real estate may be as important as religion in explaining the infamous gap between red and blue states.

The Dallas model, prominent in the South and Southwest, sees a growing population as a sign of urban health. Cities liberally permit housing construction to accommodate new residents. The Los Angeles model, common on the West Coast and in the Northeast Corridor, discourages growth by limiting new housing. Instead of inviting newcomers, this approach rewards longtime residents with big capital gains and the political clout to block projects they don’t like.

The direct results of these strategies are predictable: cheap, plentiful housing in some places, and expensive, scarce housing in others. A remodeler working on my L.A. town house a couple of years ago wistfully recalled visiting a cousin in Arlington, Texas, between Dallas and Fort Worth. He wanted to move there himself. In Arlington, he said, “you can buy a million-dollar house for $200,000.” According to Coldwell Banker’s annual sur- vey, a 2,200-square-foot, four-bedroom “middle-management” home costs around $141,000 in Arlington (or, for big spenders, $288,000 in Dallas), compared with $1 million or more in the L.A. area. One man’s million-dollar dream home is another’s plain old tract house.

Many people do pack up and move, if not to Arlington, then to Las Vegas or Charlotte. Historically a magnet for educated migrants, California has begun losing college-educated residents, on net, to other states, in large part because of the high cost of housing. Most of the South’s population growth since the 1980s has come from the lure of cheap housing created by liberal permitting policies, according to new research by the Harvard economists Edward Glaeser and Kristina Tobio. By lowering the cost of housing, these policies give residents higher real incomes compared with similarly paid workers elsewhere—a strong incentive to move, even if you don’t like bugs or hot summers. The mobile middle class gravitates to the cities where housing is affordable. “If you’re your basic $85,000-a-year person, you can’t own in Los Angeles. You can’t do it,” says the Wharton School economist Joseph Gyourko. And if you’re your basic $45,000-a-year person, closer to the U.S. median household income, you’d better pack for Texas.

That doesn’t mean Los Angeles and San Francisco are in any danger of turning into Detroit and Buffalo. To the contrary, Gyourko calls them “superstar cities,” places that offer “a rare blend” of stimulating leisure activities and a highly productive work environment. A life that looks “rushed” and “materialistic” to the folks headed for North Carolina feels exciting and creative to die-hard urbanites. As a friend who recently moved from Manhattan to Santa Monica once said to me, “When people say a place is ‘good for raising children,’ that means it’s boring.” But not everyone with a taste for urban amenities can afford the superstar life. As the number of affluent Americans grows, the rich are bidding up the price of living in these special places, increasing the gap between the superstar cities and everyplace else.

People in these high-price areas respond that they have no control over housing costs. Everyone wants to live in California, and the land is already full of houses. This isn’t Texas, with its miles and miles of empty old cotton fields. True, land is cheaper and more plentiful in less-developed parts of the country. But high-price areas could put many more units on the land they have. Research by Gyourko, Glaeser, and Raven Saks found that the lowest-density areas around expensive cities tend to have the least new construction and the most land-use restrictions. It’s actually somewhat easier to build in more densely populated towns and neighborhoods—the opposite of what you’d expect if a shortage of empty land were the problem.

Some of the higher price of L.A. real estate does reflect the intrinsic pleasure of living there, as I’m reminded every time I walk out my door into the perfect weather. Some of the price reflects the productivity advantages of being near others doing similar work (try selling a screenplay from Arlington, Texas). All of these benefits—and the negatives of traffic and smog—are reflected in the price of land.

But what exactly is that price? Consider two ways of computing the price of a quarter acre of land. You can compare the value of a house on a quarter acre with that of a similar house on a half acre. Or you can take the price of a house on a quarter acre and subtract the cost of the house itself—the price of construction. Either way, you get the value of an empty quarter acre. The two numbers should be roughly the same. But they aren’t. The second one is always bigger, because it includes not just the property but the right to build. Expanding your quarter-acre lot to a half acre doesn’t give you per- mission to add a second house.

In a 2003 article, Glaeser and Gyourko calculated the two different land values for 26 cities (using data from 1999). They found wide disparities. In Los Angeles, an extra quarter acre cost about $28,000—the pure price of land. But the cost of empty land isn’t the whole story, or even most of it. A quarter- acre lot minus the cost of the house came out to about $331,000—nearly 12 times as much as the extra quarter acre. The difference between the first and second prices, around $303,000, was what L.A. home buyers paid for local land-use controls in bureaucratic delays, density restrictions, fees, political contributions. That’s the cost of the right to build.

And that right costs much less in Dallas. There, adding an extra quarter acre ran about $2,300—raw land really is much cheaper—and a quarter acre minus the cost of construction was about $59,000. The right to build was nearly a quarter million dollars less than in L.A. Hence the huge difference in housing prices. Land is indeed more expensive in superstar cities. But getting permission to build is way, way more expensive. These cities, says Gyourko, “just control the heck out of land use.”

The unintended consequence of these land-use policies is that Americans are sorting themselves geographically by income and lifestyle—not across neighborhoods, as they used to, but across regions. People are more likely to live surrounded by others like themselves, creating a more-polarized cultural map. In the superstar cities, where opinion leaders congregate, the perception is growing that the country no longer has a place for middle-class life. Yet the same urban sophisticates who fret that you can’t live decently on less than $100,000 a year often argue vociferously that increasing density will degrade their quality of life. They may be right—but, like any other luxury good, that quality commands a high price.